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NOTE 19 – Mortgage Servicing Rights |
The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in mortgage banking income in the Consolidated Statement of Income. The Corporation manages the risk in these MSRs with securities including MBS and U.S. Treasuries, as well as certain derivatives such as options and interest rate swaps, which are not designated as accounting hedges. The securities used to manage the risk in the MSRs are classified in other assets with changes in the fair value of the securities and the related interest income recorded in mortgage banking income.
The table below presents activity for residential first-lien MSRs for the three and six months ended June 30, 2013 and 2012. Commercial and residential reverse MSRs, which are carried at the lower of cost or market value and accounted for using the amortization method, totaled $12 million and $135 million at June 30, 2013 and December 31, 2012, and are not included in the tables in this Note.
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Rollforward of Mortgage Servicing Rights |
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Three Months Ended
June 30 |
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Six Months Ended
June 30 |
(Dollars in millions) |
2013 |
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2012 |
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2013 |
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2012 |
Balance, beginning of period |
$ |
5,776 |
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$ |
7,589 |
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$ |
5,716 |
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$ |
7,378 |
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Additions |
147 |
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|
91 |
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270 |
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168 |
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Sales |
(862 |
) |
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(98 |
) |
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(1,045 |
) |
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(98 |
) |
Impact of customer payments (1)
|
(260 |
) |
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(282 |
) |
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(574 |
) |
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(803 |
) |
Impact of changes in interest rates and other market factors (2)
|
806 |
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(1,717 |
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1,138 |
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(742 |
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Model and other cash flow assumption changes: (3)
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Projected cash flows, primarily due to decreases in costs to service loans |
148 |
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666 |
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14 |
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393 |
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Impact of changes in the Home Price Index |
(123 |
) |
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5 |
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(202 |
) |
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20 |
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Impact of changes to the prepayment model |
228 |
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|
342 |
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403 |
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342 |
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Other model changes (4)
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(33 |
) |
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(888 |
) |
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107 |
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(950 |
) |
Balance, June 30 |
$ |
5,827 |
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$ |
5,708 |
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$ |
5,827 |
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$ |
5,708 |
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Mortgage loans serviced for investors (in billions) |
$ |
759 |
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$ |
1,224 |
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$ |
759 |
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$ |
1,224 |
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(1) |
Represents the change in the value of the MSR asset due to the impact of customer payments received during the period. |
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(2) |
These amounts reflect the changes in modeled MSR fair value primarily due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve. |
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(3) |
These amounts reflect periodic adjustments to the valuation model to reflect changes in the modeled relationship between inputs and their impact on projected cash flows as well as changes in certain cash flow assumptions such as cost to service and ancillary income per loan. |
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(4) |
These amounts include the impact of periodic recalibrations of the model to reflect changes in the relationship between market interest rate spreads and projected cash flows. Also included are decreases of $879 million and $929 million for the three and six months ended June 30, 2012 due to changes in OAS rate inputs.
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The Corporation primarily uses an OAS valuation approach which factors in prepayment risk to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. In addition to updating the valuation model for interest, discount and prepayment rates, periodic adjustments are made to recalibrate the valuation model for factors used to project cash flows. The changes to the factors capture the effect of variances related to actual versus estimated servicing proceeds.
The $862 million and $1.0 billion of MSRs sales during the three and six months ended June 30, 2013, primarily relate to transfers completed under definitive agreements the Corporation entered into during early 2013 to sell certain MSRs. The transfers of the MSRs are occurring in stages throughout 2013, and more than half of the servicing encompassed by these agreements had been transferred as of June 30, 2013. Certain of the remaining transfers are subject to the approval or consent of certain third parties.
Significant economic assumptions in estimating the fair value of MSRs at June 30, 2013 and December 31, 2012 are presented below. The change in fair value as a result of changes in OAS rates is included within "Model and other cash flow assumption changes" in the table below. The weighted-average life is not an input in the valuation model but is a product of both changes in market rates of interest and changes in model and other cash flow assumptions. The weighted-average life represents the average period of time that the MSR's cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the MSR's fair value.
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Significant Economic Assumptions |
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June 30, 2013 |
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December 31, 2012 |
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Fixed |
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Adjustable |
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Fixed |
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Adjustable |
Weighted-average OAS |
4.14 |
% |
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7.21 |
% |
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4.00 |
% |
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6.63 |
% |
Weighted-average life, in years |
4.90 |
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2.80 |
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3.65 |
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2.10 |
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The table below presents the sensitivity of the weighted-average lives and fair value of MSRs to changes in modeled assumptions. These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. The below sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.
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Sensitivity Impacts |
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June 30, 2013 |
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Change in Weighted-average Lives |
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(Dollars in millions) |
Fixed |
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Adjustable |
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Change in
Fair Value
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Prepayment rates |
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Impact of 10% decrease |
0.24 |
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years |
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0.18 |
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years |
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$ |
356 |
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Impact of 20% decrease |
0.50 |
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0.39 |
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752 |
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Impact of 10% increase |
(0.21 |
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(0.16 |
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(323 |
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Impact of 20% increase |
(0.40 |
) |
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(0.30 |
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(616 |
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OAS level |
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Impact of 100 bps decrease |
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$ |
291 |
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Impact of 200 bps decrease |
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607 |
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Impact of 100 bps increase |
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(268 |
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Impact of 200 bps increase |
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(517 |
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